Working Paper: NBER ID: w28595
Authors: Harrison Hong; Neng Wang; Jinqiang Yang
Abstract: We model the welfare consequences of portfolio mandates that restrict investors to hold firms with net-zero carbon emissions. To qualify for these mandates, value-maximizing firms have to accumulate decarbonization capital. Qualification lowers a firm’s required rate of return by its decarbonization investments divided by Tobin’s q, i.e., the dividend yield shareholders forgo to address the global-warming externality. The welfare-maximizing mandate approximates the first-best solution, yielding welfare gains compared to laissez faire by mitigating the weather disaster risks resulting from carbon emissions. Our model generates transitions to steady-state decarbonization-to-productive capital ratios that we use to evaluate the optimality of proposed net-zero targets.
Keywords: sustainable finance; decarbonization; climate change; welfare consequences; portfolio mandates
JEL Codes: E20; G12; G30; H50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sustainable finance mandates (G38) | required rate of return (G17) |
| decarbonization investments (G31) | required rate of return (G17) |
| higher ratios of decarbonization capital to productive capital (P18) | improved welfare outcomes (I38) |
| welfare-maximizing mandates (D69) | welfare gains (D69) |
| excessive investment in decarbonization (G31) | delayed transition to stable climate state (Q54) |
| optimal mandate (H21) | first-best outcomes (H21) |